TLDR;
This video explains how the new $6,000 senior deduction, part of a recently passed bill, impacts Roth conversion strategies for individuals aged 65 and older. It details how this deduction can create opportunities for retirees to convert more funds into a Roth IRA while managing their adjusted gross income (AGI) to minimize taxes and avoid Medicare surcharges. The video also discusses income thresholds, phase-out ranges, and provides examples of how to strategically plan Roth conversions to maximize tax benefits.
- Roth conversions remain a viable strategy with no income limits.
- A new $6,000 senior deduction (or $12,000 for married couples) is available starting in 2025 but is subject to income-based phase-outs.
- The deduction is temporary, lasting from 2025 through 2028.
- Strategic Roth conversions can help manage AGI, potentially lowering overall tax liabilities and avoiding higher tax brackets or Medicare surcharges.
Intro [0:00]
The video introduces the topic of Roth conversions for individuals 65 or older, highlighting the potential impact of a newly passed bill and its associated $6,000 senior deduction. It promises to break down what has changed, what remains the same, and how this new deduction can enhance Roth conversion strategies, especially for those in retirement focused on long-term tax planning.
What's not changing? [0:33]
The core principles of Roth conversions remain intact. Individuals can still convert pre-tax funds from traditional 401(k)s or IRAs to Roth IRAs, paying taxes in the conversion year. There are no income limits for Roth conversions, making it accessible to high-income earners. The backdoor Roth strategy, involving non-deductible contributions to a traditional IRA followed by conversion to a Roth IRA, is still a viable option.
What did change? [1:19]
While the new bill doesn't directly alter Roth conversions, it does impact the tax environment surrounding them, particularly for older Americans. The most significant change is the introduction of a new deduction specifically for seniors.
The New $6,000 Senior Deduction [1:38]
Starting in 2025, individuals aged 65 or older can qualify for a new $6,000 bonus deduction, per person. This deduction stacks on top of the existing standard deduction and the additional deduction for those over 65. For a married couple, both over 65, this could mean a total of $12,000 in additional deductions. To capture the full deduction, modified adjusted gross income (MAGI) must stay below $75,000 for single filers and $150,000 for those married filing jointly. The deduction phases out at a rate of 6% for every $1,000 above these thresholds, and it's fully phased out at $175,000 for single filers and $250,000 for married couples filing jointly.
So What Does This Have to Do with Roth Conversions? [3:31]
The amount converted in a Roth conversion is added to the adjusted gross income (AGI), which can push individuals into or through the phase-out range for the new senior deduction. This could reduce or eliminate the deduction they're eligible for. Therefore, it may be necessary to limit the amount converted to stay below the phase-out threshold, lowering AGI, reducing the tax bill, and capturing the full deduction. AGI affects eligibility for the senior deduction and also impacts how much of Social Security is taxed, potential Medicare surcharges (IRMAA), tax bracket placement, and exposure to the net investment income tax. The new deduction provides valuable breathing room when it comes to AGI, which can be used to strategically convert more into a Roth IRA.
Roth Conversion Strategy for a Married Couple [5:02]
Bob and Linda, a retired couple both 67, have $70,000 in Social Security and pension income in 2025. They want to perform a Roth conversion while keeping their income under $150,000 to qualify for the full $12,000 senior bonus deduction. If they convert $75,000 from a traditional IRA to a Roth IRA, their modified AGI would be $145,000, keeping them under the threshold. After applying deductions, their taxable income would be $98,300, placing them in the 22% marginal tax bracket, with a total tax bill of approximately $11,500. This strategy allows them to convert $75,000, capture the full deduction, stay mostly in the 12% tax bracket, minimize Medicare surcharges, and reduce the amount of Social Security subject to tax.
Now Let's See What Happens if They Convert More [7:06]
If Bob and Linda decide to convert $120,000 instead, their new income would be $190,000, exceeding the $150,000 phase-out threshold by $40,000. This means they won't receive the full $12,000 deduction, as it shrinks as income approaches $250,000, beyond which no deduction is available. This scenario is described as the "conversion danger zone," where higher taxes are paid due to moving into a higher tax bracket, and part or all of the deduction is lost. However, converting more might be strategically beneficial if they have a large IRA balance and anticipate significant required minimum distributions (RMDs) in the future. The key is to understand the trade-off and decide how far into the phase-out zone they are willing to go.
No Rate Hike in 2026 - But 2025 Still Matters [8:47]
The belief that 2025 was a deadline for Roth conversions due to expected tax rate increases in 2026 has changed. The newly passed bill permanently extends the current tax brackets, eliminating the automatic increase in 2026. However, 2025 remains a strategic year for conversions because it's the first year the new $6,000 senior deduction is available, the elevated standard deduction is still in place, and the tax brackets are stable. While the urgency has lessened, the opportunity to plan conversions efficiently remains. Although the tax brackets are now permanent, Congress can still change them. The $6,000 senior deduction is temporary, available only from 2025 through 2028, making it a unique opportunity for those over 65 to move money into a Roth IRA with more control and breathing room.
How the New Senior Deduction Affects Roth Conversions [10:42]
The new $6,000 senior deduction (or $12,000 for married couples) can make Roth conversions more attractive, depending on income level and strategy. For many retirees, it allows converting more without a corresponding increase in taxes by reducing AGI. This can lower Medicare surcharges, prevent movement into higher tax brackets, and reduce the amount of Social Security subject to tax. For higher-income households, it may encourage converting less to stay within the phase-out thresholds. Large Roth conversions can place individuals in the phase-out zone, causing them to lose some or all of the deduction. Therefore, it may be wise to convert less in a single year or spread conversions over multiple years to maintain income in the optimal range and preserve the deduction. The new deduction can be a valuable tax-saving window, allowing for slightly larger Roth conversions, but the best approach is to convert strategically based on individual circumstances.
Bloopers [12:38]
This section contains outtakes and humorous moments from the recording session.